Credit Card Help Center: Debt Management

How to manage and get out of credit card debt.

We Live in a Credit Economy!

Back in the day, most purchases were made by cash. But this started to change in the second half of the 20th century, and today, we live in a credit economy.

In the 1960s, for instance, most Americans paid cash when buying cars. Those who bought on credit would have to pay half the purchase price, and pay the restin one or two years.

In the 1970s, automobile companies started to allow loans up to three years with lowered down payments.

In the 1980s, leasing cars also became an option, taking down payments out of the equation. People who did not have the cash to buy even an economy car were able to drive luxury cars any more!

Today, almost every one in the United States finance their new car purchases, and they pay it off in up to 6 years! They keep paying considerable fees and interest while the value of the car they are driving is depreciating. After the 6 year period, when they finally pay off the loan, and legally own the car, its value is hopefully equal to the down payment required for a new car.

This is called credit economy, and to cope with it, one has to know how to do the math.

Managing your debt is crucial when it comes to putting things in track in your life. According to a study at Ohio State University, people who reported higher levels of stress in regard to their debt showed higher levels of physical impairment and reported worse health than their counterparts with lower levels of debt.

Debt stress is also mentioned among the reasons for divorce. Couples today argue more about financial issues than anything else.

Debt management is a growing problem in many regions around the world. According to a survey conducted by Consolidated Credit Counseling Services:

43% of participants stated that they had a debt-to-income ratio of 50% or more.
58% of participants stated that their credit cards were near their maximum credit limits.
62% of participants stated that they did not have a savings account.
92% of participants stated that they did no have any emergency funds for three months of living expenses.
37% of participants stated that they had taken cash advances from one credit card to make monthly payments on another credit card.
59% of participants stated that they paid only the minimum amount due on their monthly credit card statements.

If you make only the minimum payments, it would take more than 25 years to pay off a credit card balance of $5,000 - given that the APR is 12.9%. If your APR was 21%, it would take more than 85 years to payy off the same balance. This is enough proof that the best way to manage credit card debt is not to stay away from it in the first place. However, if it is too late for this, it doesn't mean that there is no way out.

If you are experiencing the following problems, it is almost definite that you desparately need to find a way to get out of debt:

You do not have enough money in the bank you pay bills before the due date.
You have so many bills that you have to write checks every day, and some of them happen to get bounced.
Your creditors are threating to turn over your account to a collection agency, and some of them have already done so.
Collection agencies keep calling.
You are getting turned down for redit regardless of where you ask for it.
Your debts have gone out of hand, and you do not even know the exact dollar value of your debt.

In order to get things back in track, always watch the following numbers - they will also help you see how you are doing:

The total amount of your short term debt.
The total amount of minimum payments per month.
The total line of credit
Monthly net income.
The rate of interest on the debts.
The credit score.
Monthly expenditures (other than debts)

The most effective solution to the debt problem is more income, however, this is not always possible. Therefore, it comes down to keeping costs down, and paying as much debt as possible.

Tips to Get Out of Credit Card Debt

Before reading the tips, please keep in mind that what you are trying to do is to get rid of your credit card debt, which, in this example, amounts to $5,000. The important thing to remember is that, paying the minimum required amount, it will take you 25 years to pay off this debt with an APR of 12.9%, and 85 years, with an APR of 21.0%. Besides, this figures do NOT include any finance fees, which can make the debt last simply forever!

You can go to a lending institution and get a loan with a fixed interest rate, and pay your card debts off. If you get a loan of $5,000 (with an APR of 12.9%) from a bank, you will be required to make 60 monthly payments of $113.31, and that will be all. At the end of 60 months, you will have paid $5,000 (the principle) plus $1,810.60 (interest). Continuing to pay the required minimums on the credit card bills, however, will take 25+ years, and at the end of the 25+ years, you will have paid $5,000 (principle) plus $5,450 (interest).
Pay at least three times of what s required by the minimum payment. This will have a considerable effect on your loan management. If you pay $200 each month for the $5000 balance (with 21% APR) as mentioned above, you can pay it all of in 34 months. That is a lot less than the 85 YEARS of minimum payments.
If you have more than one credit card debt, it is best to pay off the one with the highest APR first.
Do not hesitate to ask for professional financial advice. Consolidates Credit Counseling Services, Inc. is listed with the Better Business Service and they are federally approved advice related to credit problems. They are also reachable toll-free at 1(800)728-3632. Another web page that offers help is Genus Credit Management, also reachable at 1(800)210-4455.
Be extremely disciplined.

Does Consolidation Work to Get Out of Debt?

It depends.

There are a variety of ways to consolidate your debt, and not all are as useful or risk-free.

Home Equity Loans are the among the most popular forms of debt consolidation. Home equity loans are usually for fixed amount. The amount is paid back also in a fixed period of time.

Home Equity Lines of Credit, on the other hand, offer a credit line which can be used like that of a credit card. The way the balance is paid is also pretty much like the way a credit card balance is paid.

Home Equity Loans have lower interest rates, and the interest paid on these credit accounts are usually tax-deductible. They are also easier to get.

Refinancing is another option. If you want to lower the high interest rate of your mortgage, or if you want to refinance with the purpose of obtaining a longer mortgage, you can have the option to get some cash. One important thing to remember about refinancing is closing costs, which may be as expensive as 5% of the total amount.

Is Bankruptcy a Solution?

Bankruptcy will stop the collection companies from buggin you, but it is not necessarily a problem-free solution. In the United States, most people file under Chapter 7 of the bankruptcy code, and not under the Chapter 13 of the bankruptcy code, which requires the consumer to pay back a portion of the debts under a court-ordered plan administered by a bankruptcy trustee. However, even a Chapter 7 bankruptcy will NOT erase all debts. Student loan payments, tax debts, child and spousal support payments are not covered by Chapter 7 of the bankruptcy code. If you do not want to lose your home, you will also have to make mortgage payments. Filing fees and attorney costs also apply. If you have co-signers for any of your loans, they will be on the hook unless they also file for bankruptcy.

In a study by Elizabeth Warren, a law professor, some characteristics of bankrupt debtors are provided:

They are at an educational level slightly higher than aerage in the U.S.
90% of bankrupt debtors are "solidly middle class".
Almost half have had medical problems.
20% have recently been through a divorce.

What to Do If Collection Agencies are Calling You

The consumers' rights are defined under the federal law called Fair Debt Collection PRactices Act.

When debt collection agency calls you, always ask for the name, address, and telephone number of the agency. Write them down carefully. If you believe that you do not owe the amount presented, dispute the debt. Do not delay! Contact the collection agency immediately, and also do it in writing. Send your letter certified. Always keep all records of correspondence with the collection agency. Make sure that the statute of limitations for debt collection has not expired. If it has, the collection agency can NOT sue you. If you tell them not to call you again about the debt, they must comply. (However, that does not stop them from taking legal action.)

When you contact a collection agency about your loan, it is required to send you details about your debt in question within five days. If the statements they make are false, you can sue them.

Collection agencies do not have the right to threaten you of violence or harm. They do not have th right to use obscene or profane language. They cannot repeatedly call to annoy you. If suh things happen, you should contact a consumer law attorney for help.

Bad business practices for collection agencies also include false statements. For example, they may threaten to notify your employer and garnish your wages if you do not pay the amount in question. However, this is not possible without a court permission.

One important thing to remember is that collection accounts can almost always be negotiated - and. most of the time, to significantly lower amounts. When negotiating, do not forget to require one condition: Ask them to remove all adverse information from your credit report in exchange of payment. Do not settle for just the 'paid' statement on a collection account. Ask for the collection account to be completely removed.

You can report any problems you have with a debt collector to the Federal Trade Commission or your state attorney general's office at naag.org.

Conclusion

A lot can be said about debt management, but the truth is, there is no magical way to wipe your credit card debt away. Credit card debt can be overcome only with an extremely disciplined, persistent behavior. It is not possible to overemphasize the importance of keeping the costs down (by downsizing wherever possible), looking for ways to earn extra money, and using all the money possible to pay the debt off. Other than that, all one can do is to look for ways to transfer the debt to other accounts with lower APRs, or just consolidate by getting a bank loan.